A U.S. Securities and Exchange Commission policy requiring defendants to admit wrongdoing could lead to higher defense costs, as well as higher directors and officers liability insurance rates.

But experts also say the SEC is likely to apply its policy only in the most egregious cases, and buyers and insurers will have to wait to see what complications it creates for the market.

In June, SEC Chair Mary Jo White announced the new policy under which certain defendants will be required to admit wrongdoing to settle cases. Previously, the SEC allowed defendants to neither admit nor deny wrongdoing in settlements.

In the policy's first application in August, hedge fund adviser Philip A. Falcone, founder of New York-based Harbinger Capital Partners L.L.C., admitted wrongdoing in an $18 million settlement of accusations he secretly favored certain customer redemption requests at the expense of other investors, and improperly managed bonds issued by a Canadian manufacturing company.

In September, New York-based JPMorgan Chase & Co. admitted wrongdoing in a $200 million settlement with the SEC over charges that it misstated financial results and lacked effective internal controls to detect and prevent its traders from fraudulently overvaluing investments to conceal hundreds of millions of dollars in trading losses.

A fraud and criminal misconduct clause in many D&O policies excludes coverage if a final adjudication finds wrongdoing. But “it's really unsettled” as to whether an admission of wrongdoing in an SEC case would constitute a final adjudication and trigger the exclusion, said Will Fahey, New York-based senior vice president in the management liability group at Zurich North America.

“Once the exclusion kicks in, then you don't have any coverage,” said Peter Taffae, a D&O insurance expert at Los Angeles-based wholesale brokerage ExecutivePerils Inc.

Now is the time for companies to discuss with their D&O insurers how such a situation would affect their coverage, experts say (see related story).

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How often the SEC enforces the policy is another unknown. “Enforcement is something that's going to mature in its own right,” said Brian Dunphy, New York-based managing director at Crystal & Co.

“If the SEC does apply this only in the most egregious cases,” it will arise occasionally, said Dan A. Bailey, a member of Columbus, Ohio-based law firm Bailey Cavalieri L.L.C. “But if they start applying it to the more routine cases, then that could be an issue.”

“The government will often threaten that it won't settle unless there's an admission of liability, but when push comes to shove” it has to keep such cases moving, said Boris Feldman, a partner at law firm Wilson Sonsini Goodrich & Rosati in Palo Alto, Calif.

Directors who are reluctant to admit wrongdoing could delay settlements, Mr. Dunphy said. “I suspect there will be a longer window of time where defense costs are being paid, where the insureds are trying to avoid being forced” to admit wrongdoing because the D&O policies' conduct exclusions would kick in, he said.

“Down the road, insurance companies may look to have higher premiums to adjust their retentions accordingly, to create a better buffer” against SEC allegations, Mr. Dunphy said.

“People will fight harder and, consequently, defense costs go up dramatically, which will potentially affect D&O policies” because of indemnification as well as legal fees, said Brian Wanat, New York-based national practice leader of the financial services group at Aon Risk Solutions.

Another concern is how admission of wrongdoing in an SEC case would affect subsequent civil litigation.

Will it “become a stick” that private civil securities litigation attorneys wield because firms “are no longer free to deny these things happened?” asked John F. McCarrick, a partner with White & Williams L.L.P. in New York.

“I don't think (selective application of the SEC policy in egregious cases is) something that would move the market,” said Mr. Fahey. But “if the SEC does step up enforcement dramatically,” it could affect rates. “We have to wait and see.”

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Steve Boughal, New York-based vice president and chief underwriting officer of Hartford Financial Products, a unit of The Hartford Financial Services Group Inc., agreed that insurance markets will have to wait and see “what the potential impact will be on losses when they are insuring a target of the SEC,” as well as its effect on subsequent civil litigation. At this point, though, “I wouldn't suggest it's going to have major impact on the broader market.”

“Short-term, it's going to have no effect at all on pricing” because “we don't know how it's going to pan out in terms of costs to the insurance carriers,” said Phil Norton, Chicago-based president of the professional liability division at Arthur J. Gallagher & Co.

Longer term, it may become a question of cutting coverage for “black hats” who admit wrongdoing, and continuing to cover the innocent board members, he said.

Other questions also remain unanswered.

The Falcone agreement, for instance, was “written very carefully.” While the defendants admitted wrongdoing and that they acted recklessly, they never admitted criminal or fraudulent behavior, said Kevin LaCroix, an attorney and executive vice president of RT ProExec, a division of R-T Specialty L.L.C. in Beachwood, Ohio.

“Is that type of admission enough to trigger the fraud exclusion? We need to wait and see how the SEC implements this new policy,” Mr. LaCroix said.